An overview of bullwhip effect (1)

Oh, it has been a long time I did not update my blog! This time, I try to write something that may benefit to people who want to know the rough understanding of Bullwhip Effect. I try to write it down without looking the sources and proofreading ^^.

What is the Bullwhip Effect? It is a popular term to describe a phenomenon of amplification in order or demand variability along the supply chain. In general, the variation of demand order is higher when the information is transferred to the upper level of supply chain, in other words, the more upstream a supply chain player position, the more uncertainty of order will be received. A simulation called Beer Game can help you to understand it well.

This phenomenon in business was first examined by Procter and Gambler (P&G) in one of their best-selling product, Pampers. Lee et al published the first international paper about it in 1997 by using the term of Bullwhip Effect. Actually, it was analyzed first by Forrester in about 1950-1960 when he simulated the uncertainty of inventory among retailer, distributor, and manufacturer; but he didn’t explore the phenomenon in depth.

Based on Lee, et al.(1997), there are four major causes of Bullwhip Effect. Firstly, demand forecast updating, which happens when the real information has been readjusted since each supply chain player forecasts demand and decides safety stock level individually. Secondly, order batching, that takes place when a company is managing the slow-moving items, trying to achieve economics of scale in transportation and using Material requirements planning (MRP). Thirdly, price fluctuation, such as special discounts and price terms, can persuade consumer to buy more in advance, on the other hand, the promotion rarely changes the real consumption rate or pattern. Finally, rationing and shortage gaming, which comes up when customer exaggerate their real need when they place an order since they know the manufacturer will ration the replenishment.

Besides those major causes, order-up-to-level policy can also lead to Bullwhip Effect.

That is the (absolutely) rough explanation about the Bullwhip Effect😉.. see ya!